Bankruptcy and Divorce

Because financial troubles are so often the root cause of marital troubles, couples can find themselves contemplating both divorce and bankruptcy at the same time. Since both are highly distressing and emotional life events, it's easy to make wrong choices.

Because the cost of maintaining two households increases the couple's financial obligations, divorce will affect the kind of bankruptcy relief available to them.

Chapter 7 bankruptcy, as you may know, wipes the slate clean and allows a fresh start in life, while Chapter 13 requires at least a partial repayment of debt. In order to qualify for Chapter 7, individuals must show that they lack the ability to make even partial repayment. Under Chapter 13, a trustee is appointed to collect monthly payments for a period of 3 to 5 years, and is responsible for distributing those payments to creditors.

Thus, married couples sharing a household and both working often will not qualify for Chapter 7. However, once divorced, each might qualify. Bankruptcy regulations don't allow for divorce and bankruptcy proceedings to happen at the same time, so financial advisors often recommend finalizing the divorce first.

Of course that isn't always possible. Sometimes it's the bankruptcy itself, and living within its constraints, that becomes the "final straw" and pushes a couple to divorce.

For those who have filed Chapter 13 and divorce before the bankruptcy is discharged, the change in financial circumstances could allow some relief. The terms of the bankruptcy could be altered to allow for a lower monthly payment to the trustee, or they could be given a grace period with no payments. This relief is possible when any change in circumstances, including divorce, illness, or job loss, affects the person's ability to meet obligations under the bankruptcy.

Divorce could also qualify them to convert to Chapter 7 - under which they will no longer be required to make monthly payments.

In order to bring about any changes, a person must first file appropriate documents, and if divorcing, must show proof that one party has moved out and established a separate residence. Proof could be rent payments or utility bills.

The most important thing to remember when any kind of circumstances make it impossible to meet a scheduled payment under Chapter 13 is to notify the trustee immediately. The worst and most damaging action anyone can take in this situation is to ignore the payment without first notifying the trustee of the reason.

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